Does Leasing Mean Losing for Manufacturers and Banks?

Does Leasing Mean Losing for Manufacturers and Banks?

Taking precedent in recent automotive news is information about changes in the vehicle lease market.

Manufacturers like Chrysler have put leasing to an end, others are following suit, and still others are making lease rates so unattractive that they may as well put their lease programs to an end. Why?

Lease payments have everything to do with two things: residual value and depreciation. Residual value is a vehicle’s estimated lease-end value. Depreciation is the difference between that value and the lease price that a consumer pays over the lease term.

For years, leasing has afforded people lower and more comfortable monthly payments than they could have otherwise received buying the very same cars…great for the consumer…but apparently not so great for the manufacturer. Because certain economic factors (like the severe inflation of gas prices) can’t be predicted 3 years ahead of time, and because residual values are estimated, manufacturers and banks have been finding that the actual lease-end values of the vehicles they are leasing out are far lower than the residuals they estimated at lease inception. So what does this mean?

When leased vehicles are returned, manufacturers and banks are not able to sell them for the residual value…they have to sell them for less. Every dollar less represents a loss to the manufacturer or private bank that wrote the lease, and we’re not talking about differences of a few hundred dollars per vehicle. In some and it seems most cases, we’re talking about differences in the thousands, especially for American vehicles, and even more especially for the less “fuel efficent” vehicles like large SUVs, trucks and 8-cylinder sedans across all manufacturers. All of this said, banks and manufactuers have lost billions of dollars over the last few years. So what’s happening now?

To counteract this, manufacturers and private banks are being far more conservative, some so conservative that they have closed their leasing arms, and put an end to vehicle leasing all together. Others have simply lowered residual values which means a lower probability of loss to them at lease end, but also means increased monthly lease payments for the consumer. So how does this effect you?

For the consumer, trends are showing that, as in times past, purhcasing a vehicle may actually be a wiser financial decision (in some cases) than leasing a vehicle. If you or anyone you know is thinking of getting into a lease, make sure they do all of their homework first. Comparing a purchase to a lease has become that much more important. Need help? Contact us.